Fixed Price vs Hourly rate

by Andrejs Bundzs
 
How are we charging our clients?
 
You have probably noticed that most of freelancers or agencies charge an hourly rate for their service, whereas only a few impose a fixed rate. Why so? As a buyer you might feel frustrated when receiving a message from a prospective Freelancer “I charge $500 per hour” or “the cost of the project would be $5000.” 
 
In this article, we would like to present you the differences and reasoning behind why some service providers choose the first option, while others prefer the latter. As well as, which one is relatively better both for the buyer and the seller.
 
Before we begin, what you must understand is that Agencies have employees, so, to cover the costs, the hourly rate will be higher in comparison with an individual Freelancer. So, in this case, to get the idea straight, let’s suppose that both the Freelancer and Agency charge the same rate.
 
Let’s assume that a Client has found your profile on Upwork (one of the biggest freelancing/outsourcing platforms), they seem to like your portfolio and you seem to be a good fit to solve their pressing problem. After an engaging discussion finding out your Clients needs and demands, you must make your first call. So, “what is your hourly rate” they ask.
 
As usual, you give out a number of, say, $50 per hour. The Client agrees, however, there is one more question pending: “How many hours will it take for you to do the job?”
 
The task cannot take forever, obviously, and the Client needs to know the total cost of accepting your offer, too. Eventually, you estimate the project to take 100 hours of your time and finally you name a sum of $5000.
 
While it may seem logical, this kind of approach has its flaws that in the future may cause difficulties with how the project goes / progresses. Let’s take a deeper look!



Problem Nr. 1-Time burglar

 
The Freelancer has set a 100 hour timeframe within which he or she must do the task. And what if the task takes more than the estimated hours? Should the Freelancer ask for an additional payment? 
 
Or what if the Client asks for amendments, which eventually takes, say, 108 hours? Who should bare the responsibility - (a) the Freelancer, for not meeting the Clients needs completely, or (b) the Client, for an incomplete explanation of what they expect the outcome to be?




 

Problem Nr. 2 -The liar
 
Let’s imagine that the Freelancer is a really good expert with 10 years experience in solving these kind of issues.
 
At the time of the meeting, the Freelancer came to realise that the same problem 10 years ago took 100 hours to solve, but now it will only take 10 hours to do the work, but 10 hours of work sums up to only $500, which does not pay off at all and is also totally disproportionate to the gravity of the project. 
 
So, the Freelancer continues to lie about the 100 hours in order to cover the costs and make an earning.
 
However, the Freelancer is missing out on various important aspects here. In fact, the Client would be a lot happier to receive the end result much faster. And by doing so, the Freelancer could possibly secure a seat on the next upcoming project. And voilà - you’ve killed two birds with one stone. You have landed a successful project and kept a good relationship.
 
However, you still need to make money, right?




Problem Nr. 3 -The expensive one
 
This problem is closely related to the second problem.
 
Let’s assume again that the Freelancer is a class expert with a proven track of 10 years of experience.
 
Finally, the Freelancer understands that lying is not good and, in order to outweigh the earnings, the Freelancer increases the hourly pay by 10 times instead, - so, $500 per hour. The Freelancer has been doing these kind of tasks hundreds of times before. And while in the beginning it took 100 hours to complete, after years of experience, it now only takes 10 hours. 
 
Everything seems to be fair now. Nobody is lying, the Client receives what is expected in a shorter timespan and the Freelancer gets the deserved amount of money.
 
Wrong!
 
Why is this wrong?
 
It makes the Freelancer look very expensive and the pricing is well above the market’s average.  Eventually, it scares potential clients away.




 
 
Yes, the solution is fixed pricing.
 
Should one be paid less just because now it takes less time to complete? 
 
In reality, it is the years of experience that have made the Freelancer, the expert, so advanced in this skill, solving this issue, that it now takes so little time to complete.
 
Let’s go back to the beginning now. Imagine the Client asks you to solve a problem. You listen to the demands & needs and give out a number - $5000 for the whole project.
 
The Client might get a little suspicious about the way you randomly threw that number out. A question follows: “How did you come up with this number?”
 
You reply: “Easy, previously I did this for an hourly rate. Normally, the task took me 100 hours to solve, so I earned my $5000. But since I am now an expert and over the 10 years time, solving similar problems, I trained myself to do it in 10 hours or even less, I no longer charge hourly, but name a fixed price. You can go to an Agency or a Freelancer and they will probably ask you the same price, but it will take much more time for you to see the end result, whereas I can deliver the same and save your time by 10 times.”
 
This gives the client a competitive advantage, puts the Client ahead of its competitors by saving on one of the most valuable assets - time. 
 
And from your side, you have maintained your position in the market (you are not at all above the market value) and as a Freelancer you show honesty and professionalism that goes a long way in the business world.
 
Taken that your Client is a professional and a smart individual as well, they would accept the offer. It would be silly to turn to another provider who would spend 100 hours on the task, while here they have someone who can do it in just 10 or less.
 
 
 
This is how we approach our clients at Thinkitive Lab. The provided solutions are fast and within the same price range as our competitor’s. The service is individualised and focused on invention, as well as we remain fully honest in the way we treat our clients.
 
If you have any suggestions, questions or comments on the matter presented above, contact us on info@thinkitivelab.com and let’s chat!